Modelling & Valuing Insurance Companies

Course Overview:

This advanced valuation and modelling course looks at the valuation approaches to be taken to enable participants to value insurance companies. Given the very different nature of financial services companies such as banks and insurance companies, traditional valuation techniques cannot necessarily be applied to insurance companies.

This course looks at some of the ways of adapting valuation approaches to deal with the specific problems in valuing financial services businesses.

The course examines the approach to valuing insurance companies firstly looking at insurance company accounting, which is very different from traditional accounting and then dealing with the main forecasting issues that arise from insurance company accounting. During the course the participants will value two types of quoted insurance company, Admiral Group (a general insurance company) and Legal & General (a general and life insurance company).

The regulatory issues associated with insurance companies, including Solvency II are the discussed in a valuation context and the different challenges associated with valuing general and life assurance companies are covered.

Given the evolving nature of the regulatory environment for the financial services industry the course attempts to provide a current status for both the accounting and regulatory issues facing insurance companies and how these are likely to affect the approach to valuation.

Examples are provided to illustrate each issue and participants will model and value quoted general and life insurance companies during the course.

Participants will be required to bring a laptop to the course.

Course Content:

Insurance company accounting and regulatory issues

• Premium recognition
• Customer acquisition costs
• Investments
• Provisions
• Capital requirements – Solvency II
• Key elements of an insurance company’s financial statements

Differing insurance company business models

• The general insurance markets
• Life insurance and protection insurance markets
• Key differences and valuation challenges in valuing different insurance company business models

Modelling issues for general insurance companies

• The balance sheet approach
• The major profit and cash flow drivers for an insurance business
• Unusual aspects of insurance businesses

Valuing a general insurance business

• The underwriting result
• Modelling the income statement and balance sheet
• Modelling reserves and investments
• Derived cash flows and a valuation – cash flow to equity and residual income approaches

Unusual aspects of insurance businesses – life insurance

• The key elements of a life insurance product
• Profit versus cash flow for life assurance companies
• Value of new business
• Investment returns
• Return on shareholders’ equity
• Embedded value and the value of future growth

Modelling issues for life insurance companies

• The balance sheet approach
• The major profit and cash flow drivers for an insurance business
  • The importance of investments
• Specific issues for life companies
  • Participating and non-participating contracts
  • Investment returns across asset classes
  • Capital issues – can we forecast regulatory capital?

Valuing a life insurance business

• Modelling the income statement and balance sheet
• Modelling reserves and investments
• Derived cash flows and a valuation – cash flow to equity and residual income approaches
• Regulatory capital – estimating capital requirements

Case studies: The course will cover the modelling and valuation of a quoted general insurer (Admiral Group) and a general and life insurer (Legal & General)